Treasurys dip, but end off lows

JulieRannazzisi

NEW YORK (CBS.MW) – Treasury prices ended a sliver lower Tuesday, relinquishing the lion’s share of earlier losses as equities came under pressure, with tech stocks bearing the brunt of the selling pressure.

As the week progresses, government issues may come under additional pressure as they compete with corporate bonds for investors’ dollars.

In fact, a burgeoning corporate supply calendar in September will likely change dynamics in the marketplace during the next weeks. Among the issues on tap this week: GE Capital, with a $750 million offering, Albertson’s, with a $500 million issue, and Cox Communications, with a $500 million deal.

The 30-year bond shed 1/8 to 108 6/32 and was yielding ($TYX) 5.675 percent. A 5-year note slipped 2/32 to yield 5.91 percent and a 2-year note was off 1/32 at 100 2/32 and was yielding 6.09 percent. In the futures pit, the December T-bond contract edged up 1/32 to 100-20.

Lending some support to the long end during the trading session was a Fed coupon pass -- or a permanent injection of funds into the banking system. The central bank purchased issues with maturities ranging from May 2016 to November 2028.

Separately, the difference in yield between a 10-year note and a 2-year issue stood at a negative 40 basis points from a negative 41 basis points on Friday.

Bridgewater Associates said the drop in yields in the belly of the Treasury curve has -- for the first time in a very long time – completely removed the possibility of a Fed tightening from market pricing.

In fact, last week’s data -- including the tamer-than-expected employment report and the National Association of Purchasing Management Index’s dip below the 50-percent level – convinced markets that the Fed can stay on hold for the foreseeable future.

Bridgewater said current pricing of the fed funds future target actually implies a greater likelihood of a Fed easing as the next interest rate move versus a tightening.

“Now that credit markets are implying a slightly greater chance of an easing and a slower economy and inflation rate, we think that it’s going to be much easier for the economy/inflation to surprise the market on the upside and much more difficult to surprise on the downside,” Bridgewater concluded.

The week’s economic agenda includes the revision to second-quarter productivity numbers, July home completions, July wholesale inventories and July consumer credit. The numbers, however, aren’t likely to provide any new information on the direction of the U.S. economy.

Equity markets saw selling pressure in the tech sector, which pushed the Nasdaq ($COMPQ) down 91 points to 4,143. But the Dow Industrials ($DJ) recovered, adding 21 points to 11,260.

Over in the currency market, dollar/yen (C_JPY) lost 0.1 percent to 105.76. The dollar remains at its lowest levels since late June against the yen. Euro/dollar (C_EUR), meanwhile, dropped 0.9 percent to 0.8892.

Turning to the commodity arena, October crude rose 45 cents to $33.83 while the Bridge/CRB index added 1.30 to 229.75. The market remains concerned that OPEC will not boost oil production enough to rebuild adequate U.S. petroleum inventories. Investors also await the weekly release of the American Petroleum Institute’s figures on inventory, which will be trotted out after the close of trading Tuesday. See related story.

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